-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DctkzJc2pXb9PoVrjSxmKjnbLo27xBJL9ZQbSQsfvc8D1qJ5V38A5p9FfJmJKk7U bv4H1B8Hal1ST1/Ih5gefg== 0000912057-01-515937.txt : 20010516 0000912057-01-515937.hdr.sgml : 20010516 ACCESSION NUMBER: 0000912057-01-515937 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010331 FILED AS OF DATE: 20010515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BENCHMARK ELECTRONICS INC CENTRAL INDEX KEY: 0000863436 STANDARD INDUSTRIAL CLASSIFICATION: PRINTED CIRCUIT BOARDS [3672] IRS NUMBER: 742211011 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-10560 FILM NUMBER: 1637661 BUSINESS ADDRESS: STREET 1: 3000 TECHNOLOGY DRIVE CITY: ANGLETON STATE: TX ZIP: 77515 BUSINESS PHONE: 9798496550 MAIL ADDRESS: STREET 1: 3000 TECHNOLOGY DR CITY: ANGLETON STATE: TX ZIP: 77515 10-Q 1 a2049325z10-q.txt 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------- FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001. __ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________ TO____________. COMMISSION FILE NUMBER: 1-10560 BENCHMARK ELECTRONICS, INC. (Exact Name of Registrant as Specified in Its Charter) TEXAS 74-2211011 (State or Other Jurisdiction (I.R.S. Employer of Incorporation) Identification Number) 3000 TECHNOLOGY DRIVE 77515 ANGLETON, TEXAS (Zip Code) (Address of Principal Executive Offices) (979) 849-6550 (Registrant's Telephone Number, Including Area Code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- As of May 14, 2001 there were 19,604,653 shares of Benchmark Electronics, Inc. Common Stock, par value $0.10 per share, outstanding. PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS BENCHMARK ELECTRONICS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (AMOUNTS IN THOUSANDS)
MARCH 31, DECEMBER 31, 2001 2000 ---- ---- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents $ 22,646 $ 23,541 Accounts receivable, net 235,280 277,620 Inventories, net 309,652 346,463 Prepaid expenses and other assets 17,019 18,412 Deferred tax asset 3,467 3,135 ---------- ---------- Total current assets 588,064 669,171 ---------- ---------- Property, plant and equipment 222,075 202,404 Accumulated depreciation (93,022) (66,016) ---------- ---------- Net property, plant and equipment 129,053 136,388 ---------- ---------- Other assets, net 18,069 19,148 Goodwill, net 162,214 166,514 ---------- ---------- $897,400 $991,221 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current installments of other long-term debt $ 21,134 $ 20,275 Accounts payable 204,987 268,358 Income taxes payable 3,707 1,911 Accrued liabilities 25,183 31,309 ---------- ---------- Total current liabilities 255,011 321,853 Revolving line of credit 73,000 93,500 Convertible subordinated notes 80,200 80,200 Other long-term debt, excluding current installments 61,716 67,094 Other long-term liability 7,079 6,957 Deferred tax liability 9,836 9,672 Shareholders' equity: Preferred shares, $0.10 par value; 5,000 shares authorized, none issued - - Common shares, $0.10 par value; 30,000 shares authorized; issued - 19,651 and 19,643, respectively; outstanding - 19,602 and 19,594, respectively 1,960 1,959 Additional paid-in capital 317,951 317,849 Retained earnings 103,787 98,675 Accumulated other comprehensive loss (13,020) (6,418) Less treasury shares, at cost; 49 shares (120) (120) ---------- ---------- Total shareholders' equity 410,558 411,945 Commitments and contingencies ---------- ---------- $897,400 $991,221 ======== ========
See accompanying notes to condensed consolidated financial statements. 2 BENCHMARK ELECTRONICS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
THREE MONTHS ENDED MARCH 31, -------------------- 2001 2000 ---- ---- Sales $431,905 $ 349,155 Cost of sales 399,742 325,509 ------- --------- Gross profit 32,163 23,646 Selling, general and administrative expenses 14,159 12,681 Restructuring charges 1,266 - Amortization of goodwill 3,222 3,220 -------- --------- Income from operations 13,516 7,745 Interest expense (5,713) (5,563) Other income (expense) (500) 828 -------- --------- Income before income taxes 7,303 3,010 Income tax expense 2,191 1,033 -------- --------- Net income $5,112 $ 1,977 ======== ========= Earnings per share: Basic $ 0.26 $ 0.12 Diluted $ 0.25 $ 0.12 ======== ======== Weighted average number of shares outstanding: Basic 19,597 16,248 Diluted 20,324 17,173 ======== =========
See accompanying notes to condensed consolidated financial statements. 3 BENCHMARK ELECTRONICS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (AMOUNTS IN THOUSANDS) (UNAUDITED)
THREE MONTHS ENDED MARCH 31, ------------------ 2001 2000 ---- ---- Cash flows from operating activities: Net income $ 5,112 $ 1,977 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 13,649 12,860 Deferred income taxes 334 91 (Gain) loss on the sale of property, plant and equipment 14 (9) Federal tax benefit of stock options exercised 20 249 Changes in operating assets and liabilities: Accounts receivable 43,743 (27,122) Inventories 38,607 (34,754) Prepaid expenses and other assets 1,647 49 Accounts payable (65,980) (384) Accrued liabilities (7,226) (682) Income taxes 1,796 (634) -------- ---------- Net cash provided by (used in) operations 31,716 (48,359) -------- ---------- Cash flows from investing activities: Capital expenditures, net (3,435) (9,359) Additions to capitalized software - (466) -------- ---------- Net cash used in investing activities (3,435) (9,825) -------- ---------- Cash flows from financing activities: Proceeds from issuance (repayment) of revolving line of credit, net (20,500) 53,600 Proceeds from stock options exercised 83 507 Principal payments on other long-term debt (4,519) (4,673) -------- --------- Net cash provided by (used in) financing activities (24,936) 49,434 --------- --------- Effect of exchange rate changes (4,240) 386 --------- --------- Net decrease in cash and cash equivalents (895) (8,364) Cash and cash equivalents at beginning of year 23,541 9,437 -------- -------- Cash and cash equivalents at March 31 $ 22,646 $ 1,073 ======== ========= Supplemental disclosures of cash flow information: Income taxes paid (refunded) $ (618) $ 18 ======== ========= Interest paid $ 6,545 $ 6,223 ======== =========
See accompanying notes to condensed consolidated financial statements. 4 BENCHMARK ELECTRONICS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (AMOUNTS IN THOUSANDS, UNLESS OTHERWISE NOTED) (UNAUDITED) NOTE 1 - BASIS OF PRESENTATION Benchmark Electronics, Inc. (the Company) is a Texas corporation which provides electronics manufacturing and design services to original equipment manufacturers (OEMs) of telecommunication equipment, computers and related products for business enterprises, video/ audio/entertainment products, industrial control equipment, testing and instrumentation products, personal computer and medical devices. The Company has manufacturing operations located in the Americas, Europe and Asia. The condensed consolidated financial statements included herein have been prepared by the Company without audit pursuant to the rules and regulations of the Securities and Exchange Commission. The financial statements reflect all normal and recurring adjustments which in the opinion of management are necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the full year. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the financial statements and notes included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000. NOTE 2 - EARNINGS PER SHARE Basic earnings per share is computed using the weighted average number of shares outstanding. Diluted earnings per share is computed using the weighted average number of shares outstanding adjusted for the incremental shares attributed to outstanding stock options to purchase common stock. Incremental shares of 0.7 million and 0.9 million for the three months ended March 31, 2001 and 2000, respectively, were used in the calculation of diluted earnings per share. Options to purchase 0.8 million and 0.6 million shares of common stock for the three months ended March 31, 2001 and 2000, respectively, were not included in the computation of diluted earnings per share because the option exercise price was greater than the average market price of the common stock. The effect of the if-converted method for the 6% Convertible Subordinated Notes is antidilutive and approximately 2.0 million of potential common shares has not been considered in computing diluted earnings per share for the three-month periods ended March 31, 2001 and 2000. NOTE 3 - BORROWING FACILITIES The Company has a five-year term loan (the Term Loan) through a syndicate of commercial banks. Principal on the Term Loan is payable in quarterly installments in annual amounts of $18 million in 2001, $20 million in 2002, $22 million in 2003 and $21 million in 2004. The Term Loan bears interest, at the Company's option, at either the bank's Eurodollar rate plus 1.25% to 3.00% or its prime rate plus 0.00% to 1.75%, based upon the Company's debt ratio as specified in the agreement and interest is payable quarterly. As of March 31, 2001, the Company had $77 million outstanding under the Term Loan, bearing interest at rates ranging from 8.2925% to 8.75%. The Company has a $175 million revolving line of credit facility (the Revolving Credit Facility) with a commercial bank. The Company is entitled to borrow under the Revolving Credit Facility up to the lesser of $175 million or the sum of 75% of its eligible accounts receivable, 45% of its eligible inventories and 50% of its eligible fixed assets. Interest on the Revolving Credit Facility is payable quarterly, at the Company's option, at either the bank's Eurodollar rate plus 1.25% to 3.00% or its prime rate plus 0.00% to 1.75%, based upon the Company's debt ratio as 5 specified in the agreement. A commitment fee of 0.375% to 0.500% per annum on the unused portion of the Revolving Credit Facility is payable quarterly in arrears. The Revolving Credit Facility matures on September 30, 2004. As of March 31, 2001, the Company had $73.0 million outstanding under the Revolving Credit Facility, bearing interest at 8.5%, $4.9 million outstanding letters of credit and $97.1 million was available for future borrowings. The Term Loan and the Revolving Credit Facility (collectively the Facility) are secured by the Company's domestic inventory and accounts receivable, 100% of the stock of the Company's domestic subsidiaries, and 65% of the voting capital stock of each direct foreign subsidiary and substantially all of the other tangible and intangible assets of the Company and its domestic subsidiaries. The Facility contains customary financial covenants and restricts the ability of the Company to incur additional debt, pay dividends, sell assets, and to merge or consolidate with other persons, without the consent of the bank. The Company has outstanding $80.2 million principal amount of 6% Convertible Subordinated Notes due August 15, 2006 (the Notes). The indenture relating to the Notes contains affirmative and negative covenants including covenants restricting the Company's ability to merge or engage in certain other extraordinary corporate transactions unless certain conditions are satisfied. Upon the occurrence of a change of control of the Company (as defined in the indenture relating to the Notes), each holder of Notes will have the right to require the Company to repurchase all or part of the Holder's notes at 100% of the face amount thereof, plus accrued and unpaid interest. The Notes are convertible, unless previously redeemed or repurchased, at the option of the holder at any time prior to maturity, into shares of the Company's common stock at an initial conversion price of $40.20 per share, subject to adjustment in certain events. The Notes are convertible into a total of 1.995 million shares of the Company's common stock. Interest is payable February 15 and August 15 each year. The Company currently has an interest rate swap transaction agreement for a notional amount of $38.3 million under which it pays a fixed rate of interest of 6.63% plus 1.25% to 3.00% based upon its debt ratio as specified in the debt agreement, hedging against the variable interest rates charged by the term loan. The receive rate under the swap is based on LIBOR. The interest rate swap expires in the year 2003. NOTE 4 - INVENTORIES Inventory costs are summarized as follows:
MARCH 31, DECEMBER 31, 2001 2000 ---- ---- Raw materials $ 239,933 $ 273,758 Work in process 51,783 64,727 Finished goods 26,472 16,204 Obsolescence reserve (8,536) (8,226) ----------- ----------- $ 309,652 $ 346,463 =========== ===========
6 NOTE 5 - INCOME TAXES Income tax expense consists of the following:
THREE MONTHS ENDED MARCH 31, 2001 2000 ---- ---- Federal - Current $ 1,284 $ 278 Foreign - Current 246 554 State - Current 327 108 Deferred 334 93 ------- -------- Total $ 2,191 $ 1,033 ======== ========
Income tax expense differs from the amount computed by applying the U.S. federal statutory income tax rate to pretax income due to the impact of nondeductible amortization of goodwill, foreign income taxes, state income taxes, net of federal benefit and the benefit from the use of a foreign sales corporation. The Company considers earnings from its foreign subsidiaries to be indefinitely reinvested and, accordingly, no provision for U.S. federal and state income taxes has been made for these earnings. Upon distribution of foreign subsidiary earnings in the form of dividends or otherwise, such distributed earnings would be reportable for U.S. income tax purposes (subject to adjustment for foreign tax credits). The Company's manufacturing operations in Ireland are subject to a 10% tax rate through December 2010. Thereafter, the applicable tax rate will be 12.5%. As a result of these reduced rates, income tax expense for the quarters ended March 31, 2001 and 2000 is approximately $314 (approximately $0.02 per share diluted) and $64 (approximately $0.01 per share diluted), respectively, lower than the amount computed by applying the statutory tax rates. NOTE 6 - ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND CERTAIN HEDGING ACTIVITIES Effective January 1, 2001, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Certain Hedging Activities" and SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities, an Amendment of SFAS 133." These statements establish accounting and reporting standards requiring that derivative instruments, including certain derivative instruments embedded in other contracts, be recorded on the balance sheet at fair value as either assets or liabilities. The accounting for changes in the fair value of a derivative instrument depends on the intended use and designation of the derivative at its inception. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results of the hedged item in the statements of operations, and requires the Company to formally document, designate and assess the effectiveness of the hedge transaction to receive hedge accounting. For derivatives designated as cash-flow hedges, changes in fair value, to the extent the hedge is effective, are recognized in other comprehensive income until the hedged item is recognized in earnings. Overall hedge effectiveness is measured at least quarterly. Any changes in the fair value of the derivative instrument resulting from hedge ineffectiveness, as defined by SFAS No. 133 and measured based on the cumulative changes in the fair value of the derivative instrument and the cumulative changes in the estimated future cash flows of the hedged item, are recognized immediately in earnings. The Company has designated its swap agreement as a cash flow hedge. Adoption of SFAS No. 133 at January 1, 2001 resulted in recognition of approximately $0.7 million of derivative 7 liabilities on the Company's balance sheet in accrued liabilities and $0.7 million of hedging losses included in accumulated other comprehensive income as the cumulative effect of a change in accounting principle. Amounts were determined as of January 1, 2001 based on market quotes of the Company's interest rate swap agreement. During the quarter ended March 31, 2001, the Company recognized $19.6 thousand in losses, included in interest expense, on the interest rate swap attributable to interest costs occurring in the first quarter of 2001. No gain or loss on ineffectiveness was required to be recognized. The fair value of the interest rate swap agreement was a loss of $1.3 million as of March 31, 2001. Approximately $0.7 million (which includes $78.4 thousand related to the cumulative effect adjustment) of such amount is anticipated to be transferred into earnings over the next twelve months as interest costs on the term loan are recognized. The Company has utilized and expects to continue to utilize derivative financial instruments with respect to a portion of its interest rate risks to achieve a more predictable cash flow by reducing its exposure to interest rate fluctuations. These transactions generally are swaps and are entered into with major financial institutions. Derivative financial instruments related to the Company's interest rate risks are intended to reduce the Company's exposure to increases in the benchmark interest rates underlying the Company's variable rate Facility. NOTE 7 - ACQUISITIONS AND DISPOSITIONS On October 2, 2000, the Company acquired substantially all of the assets and properties, net of assumed liabilities, of the MSI Division of Outreach Technologies, Inc. This operation in Manassas, Virginia was acquired for $3.5 million, as adjusted. The transaction was accounted for under the purchase method of accounting, and, accordingly, the results of operations of the Manassas division since October 2, 2000 have been included in the accompanying consolidated statements of income. The acquisition resulted in goodwill of approximately $0.4 million that is being amortized on a straight-line basis over 15 years. The acquisition was allocated $1.9 million to inventories, $2.1 million to accounts receivable, $0.1 million to prepaid expenses and other current assets, $0.8 million to equipment, $1.1 million to accounts payable, $0.3 million to accrued liabilities, $0.4 million to other long-term debt and $0.4 million to goodwill. On September 15, 2000, the Company closed the previously announced sale of its Swedish operations for $19.6 million, as adjusted. The Swedish operations accounted for 6.6% of the Company's sales and 39.8% of its operating income for the quarter ended March 31, 2000. NOTE 8 - BUSINESS SEGMENTS AND GEOGRAPHIC AREAS The Company has 16 manufacturing facilities in the Americas, Europe and Asia to serve its customers. The Company is operated and managed geographically. The Company's management evaluates performance and allocates the Company's resources on a geographic basis. Intersegment sales, primarily constituting sales from the Americas to Europe, are generally recorded at prices that approximate arm's length transactions. Operating segments' measure of profitability is based on income from operations (prior to amortization of goodwill and unallocated corporate expenses). Certain corporate expenses, including items such as insurance and software licensing costs, are allocated to these operating segments and are included for performance evaluation. Amortization expense associated with capitalized software costs is allocated to these operating segments, but the related assets are not allocated. Amortization expense associated with goodwill is not allocated to the results of operations in analyzing segments, but the related balances are allocated to the segments. The accounting policies for the reportable operating segments are the same as for the Company taken as a whole. 8 Information about operating segments for the three-month periods ended March 31, 2001 and 2000 was as follows:
THREE MONTHS ENDED MARCH 31, --------- 2001 2000 ---- ---- Net sales: Americas $ 386,755 316,822 Europe 80,010 77,185 Asia 8,483 9,042 Elimination of intersegment sales (43,343) (53,894) ----------- --------- $ 431,905 349,155 ========== ========= Depreciation and amortization: Americas $ 8,867 7,068 Europe 1,344 2,397 Asia 216 175 Corporate - goodwill 3,222 3,220 ---------- ----- $ 13,649 12,860 ========== ====== Income from operations: Americas $ 15,468 7,043 Europe 3,375 4,069 Asia 537 1,143 Corporate and intersegment eliminations (5,864) (4,510) ---------- --------- $ 13,516 7,745 ========== ========= MARCH 31, DECEMBER 31, 2001 2000 ---- ---- Total assets: Americas $ 720,828 812,882 Europe 140,041 143,265 Asia 18,701 16,537 Corporate 17,830 18,537 ---------- --------- $ 897,400 991,221 ========== =======
The following enterprise-wide information is provided in accordance with SFAS No. 131. Geographic net sales information reflects the destination of the product shipped. Long-lived assets information is based on the physical location of the asset.
THREE MONTHS ENDED MARCH 31, --------- 2001 2000 ---- ---- Net sales derived from: Printed circuit boards $ 363,689 322,393 Systems integration and box build 68,216 26,762 ---------- --------- $ 431,905 349,155 ========== ========= Geographic net sales: United States $ 330,113 218,274 Europe 62,049 76,381 Asia and other 39,743 54,500 ---------- --------- $ 431,905 349,155 ========== =======
9
MARCH 31, DECEMBER 31, 2001 2000 ---- ---- Long-lived assets: United States $ 102,418 108,415 Europe 17,566 18,539 Asia and other 27,138 28,582 ---------- ---------- $ 147,122 155,536 ========== ==========
NOTE 9 - COMPREHENSIVE INCOME (LOSS) Comprehensive income (loss), which includes net income, the change in the cumulative translation adjustment and the effect of accounting for cash flow hedging derivatives, for the three-month periods ended March 31, 2001 and 2000, was $(1.5) million and $1.8 million, respectively. Total comprehensive loss for the three months ended March 31, 2001 is as follows: Net income $ 5,112 Cumulative translation adjustment (5,841) Hedge accounting for derivative financial instruments, net of tax (359) Cumulative effect attributable to adoption of SFAS No. 133 (See note 6), net of tax (402) ----------- Comprehensive loss $ (1,490) ===========
Included in the hedge accounting for derivative financial instruments of $5.8 million are reclassification adjustments of approximately $11.8 thousand. NOTE 10- CONTINGENCIES On October 18, 1999, the Company announced that its third quarter earnings announcement would be delayed and subsequently, on October 22, the Company announced its earnings for the third quarter were below the level of the same periods during 1998 and were below expectations. Several class action lawsuits were filed in federal district court in Houston, Texas against the Company and two of its officers and directors alleging violations of the federal securities laws. These lawsuits were consolidated in February 2000. The lawsuits seek to recover unspecified damages. The Company denies the allegations in the lawsuits, however, and further denies that such allegations provide a basis for recovery of damages as the Company believes that it has made all required disclosures on a timely basis. Management is vigorously defending against these actions. At the present time, the Company is unable to reasonably estimate the possible loss, if any, associated with these matters. The Company filed suit against J.M. Huber Corporation (the Seller) in the United States District Court for the Southern District of Texas for breach of contract, fraud and negligent misrepresentation on December 14, 1999 and is seeking an unspecified amount of damages in connection with the Amended and Restated Stock Purchase Agreement dated August 12, 1999 between the parties whereby the Company acquired all of the stock of AVEX from Seller. On January 5, 2000, Seller filed suit in the United States District Court for the Southern District of New York alleging that the Company failed to comply with certain obligations under the contract requiring the Company to register shares of its common stock issued to Seller as partial 10 consideration for the acquisition. Seller's suit has been consolidated with the Company's suit in the United States District Court for the Southern District of Texas. The Company intends to vigorously pursue its claims against Seller and defend against Seller's allegations. At the present time, the Company is unable to reasonably estimate the possible loss, if any, associated with these matters. During the second quarter of 2000, the Company, along with numerous other companies, was named as a defendant in a lawsuit brought by the Lemelson Medical, Education & Research Foundation (the Foundation). The lawsuit alleges that the Company has infringed certain of the Foundation's patents relating to machine vision and bar code technology utilized in machines the Company has purchased. On November 11, 2000, the Company filed an Answer, Affirmative Defenses, and a Motion to Stay based upon Declaratory Judgment Actions filed by Cognex and Symbol, manufacturers of the equipment at issue. The Company continues to explore any indemnity or similar rights the Company may have against manufacturers of the machines or other third parties. The Company intends to vigorously defend against such claim and pursue all rights it has against third parties. At the present time, the Company is unable to reasonably estimate the possible loss, if any, associated with these matters. The Company is also involved in various other legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company's consolidated financial position or results of operations. NOTE 11- RESTRUCTURING CHARGES During the quarter ended March 31, 2001, the Company recorded restructuring charges of $1.3 million related to reductions in force and included costs resulting from payment of employee severance. All such amounts were paid by March 31, 2001. NOTE 12- SUBSEQUENT EVENT In April 2001, the Company announced that it had begun undertaking steps to align its cost structure due to the slowdown in the technology marketplace. Delayed delivery dates and cancellations from customers have continued to mount as a result of the weaker demand and high levels of inventory for end products. Additionally, the pace of new program rampings has been slower than anticipated because of the reduced levels of demand for customers' products. The new program revenues have not grown at a pace sufficient to offset the downturn experienced in the existing customer programs. Based on current demand forecasts from customers for the second quarter, the Company anticipates sales for the second quarter to be approximately 10 - 15% below the first quarter. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following Management's Discussion and Analysis of Financial Condition and Results of Operations, and the discussion of market risks and legal proceedings elsewhere, contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are identified as any statement that does not relate strictly to historical or current facts. They use words such as "anticipate," "believe," "intend," "plan," "projection," "forecast," "strategy," "position," "continue," "estimate," "expect," "may," "will," or the negative of those terms or other variations of them or by comparable terminology. In particular, statements, express or implied, concerning future operating results or the ability to generate sales, income or cash flow are 11 forward-looking statements. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. The future results of our operations may differ materially from those expressed in these forward-looking statements. Many of the factors that will determine these results are beyond our ability to control or predict. Specific factors which could cause actual results to differ from those in the forward-looking statements, include: o availability and cost of customer specified components; o loss of one or more of our major customers; o delays, reductions and cancellations of orders forecasted by customers; o absence of long-term sales contracts with our customers; o our substantial indebtedness; o a decline in the condition of the capital markets or a substantial rise in interest rates; o our dependence on the industries we serve; o competition from other providers of electronics manufacturing services; o inability to maintain technical and manufacturing process expertise; o risks associated with international operations; o our dependence on certain key executives; o resolution of the pending legal proceedings; o integration of the operations of acquired companies; o effects of domestic and foreign environmental laws; o fluctuations in our quarterly results of operations; and o volatility of the price of our common stock. You should not put undue reliance on any forward-looking statements. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual outcomes may vary materially from those indicated. The following discussion should be read in conjunction with the unaudited financial statements of the Company included elsewhere in this report. GENERAL We are in the business of manufacturing electronics and provide our services to original equipment manufacturers of telecommunication equipment, computers and related products for business enterprises, video/audio/entertainment products, industrial control equipment, testing and instrumentation products, personal computers and medical devices. The services that we provide are commonly referred to as electronics manufacturing services. We offer our customers comprehensive and integrated design and manufacturing services, from initial product design to volume production and direct order fulfillment. We provide specialized engineering services including product design, printed circuit board layout, prototyping and test development. We believe that we have developed strengths in the manufacturing process for large, complex, high-density printed circuit boards as well as the ability to manufacture high and low volume products in lower cost regions such as Latin America and Southeast Asia. As our customers expand internationally, they increasingly require their electronics manufacturing services partners to have strategic regional locations and global procurement capabilities. We believe that our global manufacturing presence of 16 facilities in six countries increases our ability to be responsive to our customers' needs by providing accelerated time-to-market and time-to-volume production of high quality products. These capabilities should enable us to build stronger strategic relationships with our customers and to become a more integral part of their operations. 12 Substantially all of our manufacturing services are provided on a turnkey basis, whereby we purchase customer-specified components from our suppliers, assemble the components on finished printed circuit boards, perform post-production testing and provide our customers with production process and testing documentation. We offer our customers flexible, "just-in-time" delivery programs allowing product shipments to be closely coordinated with our customers' inventory requirements. Additionally, we complete the assembly of our customers' products at our facilities by integrating printed circuit board assemblies into other elements of our customers' products. We also provide manufacturing services on a consignment basis, whereby we utilize components supplied by the customer to provide assembly and post-production testing services. We do not typically obtain long-term purchase orders or commitments from our customers. Instead we work with our customers to develop forecasts for future orders, which are not binding. Customers may cancel their orders, change their orders, change production quantities from forecast volumes or delay production for a number of reasons beyond our control. Cancellations, reductions or delays by a significant customer or by a group of customers would have an adverse effect on us. In addition, as many of our costs and operating expenses are relatively fixed, a reduction in customer demand can adversely affect our gross margins and operating income. A substantial percentage of our sales have been made to a small number of customers, and the loss of a major customer, if not replaced, would adversely affect us. During the three months ended March 31, 2001, our three largest customers each represented in excess of 10% of our sales and together represented 46.9% of our sales, and our largest customer accounted for approximately 19.7% of our sales. Our future sales are dependent on the success of our customers, some of which operate in businesses associated with rapid technological change and consequent product obsolescence. Developments adverse to our major customers or their products, or the failure of a major customer to pay for components or services, could have an adverse effect on us. During the quarter ended March 31, 2001 and 2000, 21.3% and 35.1%, respectively, of our sales were from our international operations. The decrease in the percentage of international sales for 2001 as compared to 2000 primarily reflects the sale of the Swedish operations. RECENT ACQUISITIONS AND DISPOSITION On October 2, 2000, we acquired substantially all of the assets and properties, net of assumed liabilities, of the MSI Division of Outreach Technologies, Inc. This operation in Manassas, Virginia was acquired for $3.5 million, as adjusted. The transaction was accounted for under the purchase method of accounting, and, accordingly, the results of operations of the Manassas division since October 2, 2000 have been included in our financial statements. The acquisition resulted in goodwill of approximately $0.4 million that is being amortized on a straight-line basis over 15 years. On September 15, 2000, we closed the previously announced sale of our Swedish operations for $19.6 million, as adjusted. The Swedish operations accounted for 6.6% of our sales and 39.8% of our operating income for the quarter ended March 31, 2000. 13 RESULTS OF OPERATIONS The following table presents the percentage relationship that certain items in the Company's Condensed Consolidated Statements of Income bear to sales for the periods indicated. The financial information and the discussion below should be read in conjunction with the Condensed Consolidated Financial Statements and Notes thereto.
THREE MONTHS ENDED MARCH 31, --------- 2001 2000 ---- ---- Sales 100.0% 100.0% Cost of sales 92.6 93.2 ----- ----- Gross profit 7.4 6.8 Selling, general and administrative expense 3.3 3.6 Restructuring charges 0.3 0.0 Amortization of goodwill 0.7 0.9 ----- ----- Income from operations 3.1 2.2 Interest expense (1.3) (1.6) Other income (expense) (0.1) 0.2 ------ ----- Income before income taxes 1.7 0.9 Income tax expense 0.5 0.3 ---- ----- Net income 1.2% 0.6% ===== =====
Sales for the first quarter of 2001 were approximately $431.9 million, a 23.7% increase from sales of approximately $349.2 million for the same quarter in 2000. Of this total increase in sales, approximately 45.4% was attributable to the operation of the new facilities added during the fourth quarter of 2000 and the Manassas, Virginia acquisition, and approximately 82.6% resulted from the ramping up of new programs and increases in sales volume from both existing and new customers. Of this net increase, there is a 28% decrease resulting from the sale of the Swedish operations. However, based on delayed delivery dates and cancellations of customer orders during the quarter ended March 31, 2001, we anticipate sales for the second quarter to be approximately 10 - 15% below the first quarter. Our facilities in the Americas provided 85.9% and 78.4% of net sales, respectively, during the first quarters of 2001 and 2000. Our facilities in Europe provided 12.1% and 19.1% of net sales, respectively during the first quarters of 2001 and 2000. Our facilities in Asia provided 2.0% and 2.5% of net sales, respectively during the first quarters of 2001 and 2000. Sales in the Americas for the three-month period ended March 31, 2001 increased $97.4 million with approximately 37.8% of this increase resulting from the operation of the new facilities added during the fourth quarter 2000 and the acquisition of the Manassas, Virginia facility. The remaining 62.2% of the increase was the result of demand increases from existing and new customers. Sales in Europe decreased $14.3 million for the first quarter of 2001 due primarily to the sale of the Swedish operations in September 2000 (representing approximately 161.5% of this net decrease). The remaining 61.5% of the net increase in sales resulted from the ramping up of new programs and increases in sales volume from both existing and new customers. Sales in Asia decreased by $0.3 million. This decrease in sales was partially offset by additional sales resulting from the operation of the new systems integration facility in Singapore. During the quarters ended March 31, 2001 and 2000, 21.3% and 35.1%, respectively, of our sales were from our international operations. The decrease in the percentage of international sales for 2001 as compared to 2000 primarily reflects the sale of the Swedish operations. 14 Our results of operations are dependent upon the success of our customers, and a prolonged period of reduced demand for our customers' products would have an adverse effect on our business. During the three months ended March 31, 2001, our three largest customers each represented in excess of 10% of our sales and represented 46.9% of our sales in the aggregate. The loss of a major customer, if not replaced, would adversely affect us. Gross profit increased 36.0% to approximately $32.2 million in the first quarter of 2001 from approximately $23.6 million in the same quarter in 2000. The increase in gross profit was due primarily to the higher sales volume. Gross profit as a percentage of sales for the three months ended March 31, 2000 and 2001, respectively, increased from 6.8% to 7.4%. The change in the gross margin for the three-month period of 2001, as compared to the same period of 2000 is primarily attributable to increased capacity utilization, changes in product mix, favorable component market conditions, cost reductions, and efforts to integrate recent acquisitions. The combined effect of these factors, which are continually changing and are interrelated, make it impracticable to determine with precision the separate effect of each factor. We expect lower volumes and utilization rates will exert downward pressure on our margins in the near future. For the foreseeable future, our gross margin is expected to depend primarily on the general slowdown in the technology marketplaces, facility utilization, product mix, start-up of new programs, pricing within the electronics industry, and the integration of acquisitions. The gross margins at each facility and for Benchmark as a whole are expected to continue to fluctuate. Increases in start-up costs associated with new programs and pricing within the electronics industry also could adversely impact our gross margin. In April 2001, we announced that we had begun undertaking steps to align our cost structure due to the slowdown in the technology marketplace. Delayed delivery dates and cancellations from customers have continued to mount as a result of the weaker demand and high levels of inventory for end products. Additionally, the pace of new program rampings has been slower than anticipated because of the reduced levels of demand for customers' products. The new program revenues have not grown at a pace sufficient to offset the downturn experienced in the existing customer programs. Based on current demand forecasts from customers for the second quarter, we anticipate sales for the second quarter to be approximately 10 - 15% below the first quarter. Selling, general and administrative expenses were $14.2 million in the first quarter of 2001, an increase of 11.7% from $12.7 million for the same quarter in 2000. Selling, general and administrative expenses as a percentage of sales decreased from 3.6% for the first quarter of 2000 to 3.3% for the first quarter of 2001. The increase in selling, general and administrative expenses during the three-month period ended March 31, 2001 reflects the additional administrative expenses resulting from the acquisition of the Manassas, Virginia facility and the opening of additional facilities. Additionally, the increase reflects the investment in personnel and the incurrence of related corporate and administrative expenses necessary to support the increased size and complexity of our business. We do not anticipate selling, general and administrative expenses will continue to increase in absolute dollars as a result of on-going efforts to manage operating expenses in response to the current business environment. During the quarter ended March 31, 2001, we recorded restructuring charges of $1.3 million ($0.9 million after-tax) related to reductions in force necessitated by the general slowdown in the technology marketplaces, which affected not only existing customer programs but also the pace of the new program rampings. 15 Goodwill is amortized on a straight-line basis over an estimated useful life of 15 years. The amortization of goodwill for the three-month periods ended March 31, 2001 and 2000, was $3.2 million. Interest expense for the three-month periods ended March 31, 2001 and 2000, was $5.7 million and $5.6 million, respectively. Income tax expense of approximately $2.2 million represented an effective tax rate of 30.0% for the three-month period ended March 31, 2001, compared with an effective tax rate of 34.3% for the three-month period ended March 31, 2000. The decrease was due primarily to lower foreign tax rates applicable to a portion of pretax income in 2001, partially offset by nondeductible amortization of goodwill. We reported net income for the three-month period ended March 31, 2001 of approximately $5.1 million, or diluted earnings of $0.25 per share, compared with net income of approximately $2.0 million, or diluted earnings of $0.12 per share for the same period of 2000. The approximate $3.1 million increase was a result of the combined effects of the Manassas, Virginia facility acquisition and the operation of new systems integration facilities, the restructuring charges, and the ramping up of new projects. LIQUIDITY AND CAPITAL RESOURCES We have financed our growth and operations through funds generated from operations, proceeds from the sale of our securities and funds borrowed under our credit facilities. Cash provided by (used in) operating activities was $31.7 million and $(48.4) million for the three months ended March 31, 2001 and 2000, respectively. The increase in cash provided by operations was primarily the result of decreases in accounts receivable and inventories partially offset by decreases in accounts payable. Our accounts receivable and inventories at March 31, 2001 decreased $43.7 million and $38.6 million, respectively, over their levels at December 31, 2000, reflecting our decreased backlog during the first three months of 2001, as compared to the corresponding period in the prior year. We expect continued decreases in accounts receivable and inventories to continue in the near term as a result of the general slowdown in the technology marketplaces. Cash used in investing activities was $3.4 million and $9.8 million for the three months ended March 31, 2001 and 2000, respectively. Capital expenditures of $3.4 million for the three months ended March 31, 2001 were primarily concentrated in test and manufacturing production equipment. We expect continued decreases in capital expenditures as a result of the general slowdown in the technology marketplaces. Cash provided by (used in) financing activities was $(24.9) million and $49.4 million for the three months ended March 31, 2001 and 2000, respectively. During the three months of 2001, we decreased borrowings outstanding under our revolving line of credit by $20.5 million (net) and made principal payments on other long-term debt totaling $4.5 million. Principal on the term loan is payable in quarterly installments of $4.5 million, $5 million and $5.5 million during 2001, 2001 and 2003, respectively. The final three installments of $7 million are due on the last day of March, June and September 2004. We have a $175 million revolving line of credit facility with a commercial bank. We are entitled to borrow under the revolving credit facility up to the lesser of $175 million or the sum of 16 75% of our eligible accounts receivable, 45% of our eligible inventories and 50% of our eligible fixed assets. Interest on the revolving credit facility and the term loan is payable quarterly, at our option, at either the bank's Eurodollar rate plus 1.25% to 3.00% or its prime rate plus 0.00% to 1.75%, based upon our debt ratio as specified in the agreement. A commitment fee of 0.375% to 0.500% per annum on the unused portion of the revolving credit facility is payable quarterly in arrears. The revolving credit facility matures on September 30, 2004. As of March 31, 2001, we had $73.0 million outstanding under the revolving credit facility, bearing interest at 8.5%, $4.9 million outstanding letters of credit and $97.1 million was available for future borrowings. The term loan and the revolving credit facility are secured by our domestic inventory and accounts receivable, 100% of the stock of our domestic subsidiaries, and 65% of the voting capital stock of each direct foreign subsidiary and substantially all of our and our domestic subsidiaries other tangible and intangible assets. The term loan and revolving credit facility contain customary financial covenants and restricts our ability to incur additional debt, pay dividends, sell assets, and to merge or consolidate with other persons, without the consent of the bank. We have outstanding $80.2 million principal amount of 6% Convertible Subordinated Notes. The indenture relating to the notes contains affirmative and negative covenants, including covenants restricting our ability to merge or engage in certain other extraordinary corporate transactions unless certain conditions are satisfied. Upon the occurrence of a change of control of our Company (as defined in the indenture relating to the notes), each holder of notes will have the right to require us to repurchase all or part of the holder's notes at 100% of the face amount thereof, plus accrued and unpaid interest. The notes are convertible into shares of our common stock at an initial conversion price of $40.20 per share at the option of the holder at any time prior to maturity, unless previously redeemed or repurchased. Our operations, and the operations of businesses we acquire, are subject to certain foreign, federal, state and local regulatory requirements relating to environmental, waste management, health and safety matters. We believe we operate in substantial compliance with all applicable requirements and we seek to ensure that newly acquired businesses comply or will comply substantially with applicable requirements. To date the costs of compliance and workplace and environmental remediation have not been material to us. However, material costs and liabilities may arise from these requirements or from new, modified or more stringent requirements in the future. In addition, past, current and future operations may give rise to claims of exposure by employees or the public, or to other claims or liabilities relating to environmental, waste management or health and safety concerns. We may require additional capital to finance further enhancements to or acquisitions or expansions of our manufacturing capacity. Management believes that the level of working capital will continue to expand or constrict at a rate generally consistent with our operations. Management continually evaluates potential strategic acquisitions and investments, but at the present time, we have no understandings, commitments or agreements with respect to any such acquisition or investment. Although no assurance can be given that future financing will be available on terms acceptable to us, we may seek additional funds from time to time through public or private debt or equity offerings or through bank borrowings to the extent permitted by our existing debt agreements. Our acquisitions in 1999 have significantly increased our leverage ratio and decreased our interest coverage ratio. At March 31, 2001, our debt to total capitalization ratio was 37%, as compared to 39% at December 31, 2000, 44% at December 31, 1999 and 11% at June 30, 1999, the last fiscal quarter end prior to the AVEX acquisition. The level of indebtedness, among other 17 things, could make it difficult for us to obtain any necessary financing in the future for other acquisitions, working capital, capital expenditures, debt service requirements and other expenses; limit our flexibility in planning for, or reacting to changes in, our business; and make us more vulnerable in the event of an economic downturn in our business. Management believes our existing cash balances, funds generated from operations and available funds under our revolving credit facility will be sufficient to permit us to meet our liquidity requirements for the next 9-12 months. ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We have exposure to interest rate risk under our variable rate revolving credit and term loan facilities. These facilities are based on the spread over the bank's Eurodollar rate or its prime rate. Inflation and changing prices have not significantly affected our operating results or the markets in which we perform services. We currently have an interest rate swap transaction agreement for a notional amount of $38.3 million under which we pay a fixed rate of interest of 6.63%, plus 1.25% to 3.00% based upon our debt ratio as specified in the debt agreement, hedging against the variable interest rates charged by the term loan. The interest rate swap expires in the year 2003. The receive rate under the swap is based on LIBOR. Our international sales are a significant portion of our net sales; we are exposed to risks associated with operating internationally, including the following: o Foreign currency exchange risk; o Import and export duties, taxes and regulatory changes; o Inflationary economies or currencies; o Economic and political instability. We do not use derivative financial instruments for speculative purposes. Our policy is to maintain a hedged position for certain significant transaction exposures. These exposures are primarily, but not limited to, vendor payments and inter-company balances in currencies other than the functional currency of the operating entity. Our international operations in some instances operate in a natural hedge because both operating expenses and a portion of sales are denominated in local currency. During 2000, we had one foreign currency hedging contract in place to support expansion of the Dublin, Ireland facility. This contract expired in December 2000. PART II - OTHER INFORMATION ITEM 1 - LEGAL PROCEEDINGS On October 18, 1999, we announced that our third quarter 1999 earnings announcement would be delayed and subsequently, on October 22, we announced our earnings for the third quarter 1999 were below the level of the same periods during 1998 and were below expectations. Several class action lawsuits were filed in federal district court in Houston, Texas against Benchmark and two of its officers and directors alleging violations of the federal securities laws. These lawsuits were consolidated in February 2000. The lawsuits seek to recover unspecified damages. We deny the allegations in the lawsuits, however, and further deny that such allegations provide a basis for recovery of damages as we believe that we have made all required disclosures on a timely basis. 18 Management is vigorously defend against these actions. No material developments occurred in this proceeding during the period covered by this report. Benchmark filed suit against J.M. Huber Corporation (Seller) in the United States District Court for the Southern District of Texas for breach of contract, fraud and negligent misrepresentation on December 14, 1999 and is seeking an unspecified amount of damages in connection with the contract between Benchmark and Seller pursuant to which Benchmark acquired all of the stock of AVEX and Kilbride Holdings B.V. On January 5, 2000, Seller filed suit in the United States District Court for the Southern District of New York alleging that Benchmark failed to comply with certain obligations under the contract requiring Benchmark to register shares of its common stock issued to Seller as partial consideration for the acquisition. Seller's suit has been consolidated with Benchmark's suit in the United States District Court for the Southern District of Texas. Benchmark intends to vigorously pursue its claims against Seller and defend against Seller's allegations. No material developments occurred in this proceeding during the period covered by this report. During the second quarter of 2000, Benchmark, along with numerous other companies, was named as a defendant in a lawsuit brought by the Lemelson Medical, Education & Research Foundation (the Foundation). The lawsuit alleges that Benchmark has infringed certain of the Foundation's patents relating to machine vision and bar code technology utilized in machines the Company has purchased. On November 11, 2000, Benchmark filed an Answer, Affirmative Defenses, and a Motion to Stay based upon Declaratory Judgement Actions filed by Cognex and Symbol, manufacturers of the equipment at issue. We continue to explore any indemnity or similar rights Benchmark may have against manufacturers of the machines or other third parties. Management intends to vigorously defend against such claim and pursue all rights it has against third parties. No material developments occurred in this proceeding during the period covered by this report. Benchmark is also involved in various other legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on Benchmark's consolidated financial position or results of operations. ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K None. 19 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on May 15, 2001. BENCHMARK ELECTRONICS, INC. (Registrant) By: /s/ Donald E. Nigbor ---------------------- Donald E. Nigbor President (Principal Executive Officer) By: /s/ Cary T. Fu ---------------------- Cary T. Fu Executive Vice President (Principal Financial Officer) 20 -----END PRIVACY-ENHANCED MESSAGE-----